Why don’t more people invest in index funds given they are so safe?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 563.9 million views in recent years.

In the answers below I focused on the following topics and issues:

• Why don’t more people invest in index funds given they are so safe?
• Why is business ownership the best for an investor?
• Who is one of the most frugal millionaires out there?
• I’m almost 18 and I inherited 3.5 million dollars can I live off this for the rest of life by investing it?
• Why would billionaires risk their money in stocks?

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Some of the links and videos referred to might only be available on the original answers. 

Source for all answers – Adam Fayed’s Quora page.

Why don’t more people invest in index funds given they are so safe?

Index Funds are for LOSERS

So said the YouTube video above.

Now, of course, when you watch the video, you learn that he is a fan of index funds and ETFs.

The points he is making are:

1. Many people want to invest in the next big thing, like the hot technology or crypto funds that existed in 2020 and 2021.
2. Buying passive funds doesn’t mean you will always “win”. Sometimes you will do worse than in other funds. There is merely a good chance that you will do well long term.

You are correct that index funds, if held long-term, are safe, as per the graph below.

Yet they aren’t always safe because:

1. It is easy to think “this time is different”. Most people seem to want to buy when everybody else invests (1999) and sell when others are panicking (2008). In 2020, over 35% of people sold their entire portfolios! That explains the below data:

2. You need to invest in broadly-diversified index funds (the S&P500 and MSCI World are two examples of these) rather than country-specific ones like the Columbian index fund as one example of many.

Yes, the S&P500 is a US index, but most American firms are global.

3. Following on from the first point, you ideally need to be in both small and large-cap index funds. The UK is an excellent example of that.

The FTSE250 (and FTSE All Stars) has performed so much better than the FTSE100 over the last twenty years.

4. Many studies have shown that investors who use advisors, or never log into their investment accounts, outperform, because they don’t panic as easily during the tough moments.

So, you are often your most significant risk when investing, rather than the investing itself.

Emotions kill returns.

Cars and planes are safe in general too, but human error causes more accidents than mechanical failure.

Why is business ownership the best for an investor?

I assume you mean owning your own business is the best investment because owning stocks, shares, funds, and ETFs is still holding businesses.

In that case, it is very debatable.

It is true in one sense.

If you succeed at owning your own business, it will beat any other form of investment, hands down.

That includes even leveraged investments.

You have to remember, though, that most businesses fail:

Therefore, saying “owning a private business beats the stock, bond and real estate market” isn’t comparing apples with apples.

You are taking more risks, and usually require more specific skills and experience to make it work.

Most people who succeed in private business have 5-10 years+ of experience in a relevant domain.

Beyond that, don’t forget that almost every successful business owner eventually has private investments.

In other words, even if the actual money is made from a business, that money eventually gets reinvested into private investments.

The main reasons are:

1. Private investments can be relied upon if we get sick more than a personal business that relies on an owner. This becomes less of an issue when a company starts delegating and outsourcing more.
2. It isn’t good to put all our eggs in one basket.
3. Particular investments are easier to sell, like ETFs, compared to a private business.
4. In private businesses, we often rely on “rented real estate”. What do I mean by that? Well, let’s say we rely on social media. The social media company could cut us off. Or the government could ask for a different license or close down our business niche. It happens more than you think. After Brexit as just one example, so many businesses went under in financial services as they were relying on “passporting” into the EU. In Thailand in 2014, I also personally knew people who lost successful businesses after the military coup. Recently, in the UK, the regulators made it more difficult for legal but unregulated businesses to advertise certain financial services (they got Facebook and some social media to ban ads even if they are legal if they were focusing on unregulated high-net-worth asset areas). The list could go on and on. There is more uncertainty when it comes to private businesses.
5. Due to the internet, more private businesses are global than ever, but most small and medium-sized firms are still localized. Therefore, a diversified international portfolio of funds and ETFs is lowering country-specific risks.
6. If we die, our beneficiaries might not know how to run the business. Knowing how to run a private portfolio is easier, as you can just buy and hold and take out small dividends.
7. The stock market is just a collection of businesses. Buying the S&P500 is purchasing 500 large companies. Small businesses can grow very fast in the early days, but over time, it gets harder to beat the public stock market. If you have a $500,000 profit business, beating the stock market’s 10% per annum long-term return is achievable. It gets more difficult if you have a $10m profit business.

And that isn’t to mention that many people aren’t suited to starting a business and are better off with a job.

Even if we are suited to running a private business, it still makes sense to have private investments.

Who is one of the most frugal millionaires out there?

I guess it depends on the situation.

I once heard about the British billionaire John Caudwell, who started Phones 4u.

He actually owns a lot of expensive things, but he cuts his own hair, because he thinks it is not only a waste of money, but also time.

Most self-made billionaires were frugal when they were just getting started, but if you have such an enormous amount of money, then you can spend just a small percentage of it and still buy some extravagant things.

When it comes to multi-millionaires, being frugal is much more common because many aren’t high income so have only became wealthy due to investing and spending well for decades.

Somebody worth say $5m, with $2m of that tied up in a house and pensions, but with $75,000 in income needs to be frugal most of the time, otherwise the money will run out.

So, plenty will sometimes go to Pound or Dollar shops. I heard an interesting story about that.

A friend told me that she knows a fairly wealthy person who lives in a big house, and is seen as quite flash by many of her friends.

However, she buys the grandkids sweets and gifts from the Pound shop. Probably because nobody can see such frugality, unless they recognize her in there.

I have met many people like that before.

I’m almost 18 and I inherited 3.5 million dollars can I live off this for the rest of life by investing it?

It depends.

Even if we ignore if you should retire or not, or will get bored, everybody can agree that it is good to have the ability to live off the money for the rest of your life.

If you were closer to a conventional retirement age, then you could withdraw about 4% of the portfolio per year, if you were invested in the right areas.

As you are only 18, then 3% is safer. That is $105,000, and then you can adjust that amount with inflation.

That is livable in most, but not all, cities in the world. Probably about 95% of cities, or even 98%.

The tips I would give are:

• Get proper advice for your situation before doing anything
• It is better if you can not touch the money for a few years, as then you could be getting 3% for life on $4m or $5m.
• Don’t take loads of risks. It is true that if you invest in certain areas, you might be able to get over 3%. It is also true that very vanilla options, like the S&P500, have delivered about 6.7% above inflation, on average every year, albeit with a lot of volatility. In your situation, however, wealth preservation matters more than just getting the best possible return, so you need to be conservative.
• If you get a job in the coming years and don’t need to dip into the money, then you can be less conservative.
• Don’t keep it in cash as inflation will erode it, or currency collapse in some counties.
• Avoid having too much in illiquid assets like property, even if the yield is good, as you are just pushing up the risk. Having a portion in property is OK though.

In your shoes, I would be conservative, find a career, and have the money on the side for a rainy day.

Why would billionaires risk their money in stocks?

Consider this.

How did almost every self-made billionaire yet rich?

By starting a business that got big.

The stock market is merely a collection of businesses.

Therefore, if you think running your own business is risky, buying hundreds or thousands of small, medium and large companies is less risky because of diversification – not putting all your eggs in one basket.

If you don’t think running your own business is risky, then by the same logic, investing in a more diverse range of companies also isn’t.

Besides, investing in stocks isn’t risky provided:

1. You aren’t invested in just one store, or a small collection of supplies. Even large-cap firms can indeed go to zero, such as Lehman Brothers in 2008 or Enron a few years before that:

But if you hold the entire stock market, you aren’t really risking your money if you stay invested for decades:

2. You own more than stocks

If you own bonds and stocks, your chances of being down are even lower:

That isn’t to mention if you go into other assets as well, such as real estate investment trusts (REITs), it can be even safer.

Beyond that, we have to remember the following facts

1. When you have a small business, it is easier to beat the S&P 500. Once you have a large company, it becomes more difficult.
2. It is easier and safer to pass on stock market assets to your beneficiaries if you die, compared to a business they might not know how to run.
3. It doesn’t have to be one or the other. It is possible to keep owning your primary business and invest on the side.
4. A loss and a decline aren’t the same things. Nobody “lost” the money invested in the S&P 500 in 2008 unless they pressed the sell button. People just had to wait 2.5–3 years to see a recovery.

So, if done right, you don’t risk long-term losses in any realistic scenario.

Pained by financial indecision?

Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.